UK services sector grows at fastest pace in over six years

Monday, 5 Aug 2013 | 4:53 AM ETReuters

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Alexander Alioto

Britain's dominant services sector grew at its fastest pace in more than six years last month, suggesting a nascent economic recovery is rapidly building steam, a monthly industry survey showed on Monday.

The Markit/CIPS services purchasing managers' index (PMI) leapt to 60.2 in July from 56.9 in June, its highest level since December 2006 and a bigger gain than forecast by any of the economists polled by Reuters.

The index has been above the 50 mark that divides growth from contraction for seven months, and the rise follows strong gains in equivalent manufacturing and construction surveys.

Taken together, the data give the highest composite PMI since the series started in 1998, suggesting economic output from July to September is well-placed to beat the 0.6 percent recorded for the previous three months.

"Although an early call on one month's data, the forward-looking elements from the survey point to a further strengthening of GDP in Q3 as the UK heads towards 'escape velocity' and self-sustaining economic expansion," said Paul Smith, senior economist at survey compilers Markit.

Both new orders and business confidence in the services sector rose in July, with the new orders coming in at their fastest pace since November 2006.

While firms said that some of July's strength was due to unusually warm weather, overall the figures point to a very rapid turnaround for Britain's economy, which just a few months ago looked vulnerable to facing a third recession in five years.

Although Britain's economy is still 3 percent smaller than before the financial crisis, following a slower recovery than in any big economy save Italy's, signs of expansion also pose a challenge for the Bank of England.

On Wednesday, new governor Mark Carney is due to say whether the BoE will go ahead with a policy of 'forward guidance' aimed at keeping down bond yields while the economy remains fragile.

But some BoE policymakers may be reluctant to make a lengthy commitment to low rates at a time when the economy may be on the cusp of a more rapid recovery.

Questions about the sustainability of future growth are also likely to persist. Recent growth appears to have been driven by consumers reducing the amount they save, and temporary government schemes to boost the housing market.

"A full and real recovery for many people will be one that results in meaningful job creation, a strengthening in real wages and an associated improvement in living standards which have been under substantial pressure in recent years," said Markit's Smith.

The PMI survey showed a continued increase in services employment, at a pace only slightly slower than the six-year peak recorded in June.

But stronger demand was also pushing up the prices firms charged at the fastest rate since June 2011, suggesting disposable income is likely to remain under pressure.

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